Income Protection Comparisons

Income Protection Benefits are Assessable

Once you go on claim, your monthly income protection payments are generally considered assessable for tax purposes by the Australian Taxation Office (ATO).

The ATO’s view on Income Protection benefits

The ATO deems assessable income to include all ordinary income derived directly or indirectly from all sources during the income year.

As payments of salary and wages are deemed part of assessable income, the ATO considers that an amount that compensates for the loss of salary or income generally acquires the character of that for which it is substituted.

Therefore, if you claim on your income protection policy, the monthly benefit that you receive are considered by the ATO to replace the salary or wages that you would normally earn, and hence your monthly benefit are considered to be ordinary income.

How are your Income Protection payments taxed?

Similar to your wages, your income protection benefit payments will be added to your taxable income in your personal tax return. Your income protection company will provide you with a payment summary so that you can complete your tax return.

You will then need to pay any tax owing when you complete your tax return. The rate at which your benefit is taxed will correspond to the marginal tax rate your benefit falls under as specified in the below table.

Taxable Income

Tax on this income

0-$6000

Nil

$6,001-$37,000

15c for each $1 over $6,000

$37,001-$80,000

$4,650 plus 30c for each $1 over $37,000

$80,001 - $180,000

$17,550 plus 37c for each $1 over $80,000

$180,001 and over

$54,550 plus 45c for every $1 over $180,000

Above: Australian resident tax rates for 2011-12. Source: ATO

Example – Paying Tax on Income Protection Benefits

For the last financial year, Mathew has received a total of $75,000 in income protection benefits.

As his total benefit for the last financial year falls between $37,001 – $80,000, Mathew will need to pay:

No tax on every dollar received up to $6,000.

15% tax on every dollar received up to $37,000

30% tax on every dollar received up to $75,000

If you need assistance with your monthly benefits, please call 1300 135 205 to speak with one of our friendly advisors.